First Community Bancshares, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The multi-state financial holding company operates community banking and insurance businesses across Virginia, West Virginia, North Carolina, and Tennessee. This unaudited report covers the quarter and nine months ended September 30, 2011; balance-sheet changes are measured against December 31, 2010. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 earnings: Net income was $5.32 million versus $6.55 million in Q3 2010. Net income available to common shareholders was $5.03 million, or $0.28 per diluted share, versus $6.55 million, or $0.37. The decline was primarily attributed to lower securities gains.
- Nine-month earnings: Net income was $16.80 million versus $16.96 million; diluted EPS was $0.91 versus $0.95. Common earnings included $0.42 million of preferred dividends in 2011.
- Interest income and margin: Q3 interest income was $23.05 million (down from $25.84 million); net interest income was $17.73 million (down 4.6%). Nine-month net interest income was $53.76 million (down 3.6%). Tax-equivalent net interest margin was 3.77% for Q3 and 3.85% year to date, down 10 and 9 basis points, respectively, year over year. Management cited lower earning-asset balances and yields in a prolonged low-rate environment.
- Other income and expenses: Q3 noninterest income was $8.07 million versus $10.94 million, reflecting sharply lower securities gains; nine-month noninterest income increased to $28.93 million from $28.42 million. Q3 noninterest expense fell to $16.06 million from $17.43 million, while nine-month expense rose to $51.86 million from $50.10 million. Nine-month expense included a $0.47 million FHLB prepayment fee.
- Credit costs: Provision for loan losses was $1.92 million in Q3 and $6.61 million for nine months, compared with $3.81 million and $11.07 million in 2010. Nine-month net charge-offs were $6.69 million, down from $8.93 million. Allowance was $26.41 million, or 1.92% of loans held for investment.
- Balance sheet and liquidity: Assets were $2.22 billion, down 1.1% from year-end; loans held for investment were $1.37 billion, down $11.55 million. Deposits declined $30.46 million to $1.59 billion. Cash and cash equivalents increased $36.13 million to $148.32 million. The company reported $157.07 million of unpledged available-for-sale securities and approximately $160.71 million of FHLB credit availability.
- Debt and capital: Repurchase agreements, FHLB borrowings, and other indebtedness totaled $305.45 million, down from $332.09 million at year-end. Stockholders’ equity rose to $304.12 million from $269.88 million, aided by an $18.80 million net preferred-stock issuance and $4.22 million of other comprehensive income. The holding company’s total risk-based capital ratio was 17.94%; the Bank’s was 15.69% and it was deemed well capitalized.
- Cash flow: For the first nine months, operating activities generated $34.35 million, investing activities generated $46.67 million, and financing activities used $44.89 million. Cash and cash equivalents increased $36.13 million to $148.32 million.
Material changes and credit developments
- Nonperforming loans were 1.73% of loans, versus 1.78% at year-end 2010. However, nonaccrual loans increased to $22.88 million from $19.41 million, and nonperforming assets were $29.78 million, or 1.34% of assets, compared with $29.65 million and 1.32% at year-end.
- Other real estate owned increased to $5.94 million from $4.91 million. The company recorded $2.13 million of net OREO sale losses for the first nine months. Total past-due loans were $27.30 million; there were no loans 90 days past due and still accruing.
- The loan mix shifted: commercial loans increased to 51.4% of the portfolio from 45.9% at year-end, while consumer real estate loans declined to 42.9% from 49.0%, partly reflecting loan-category segmentation changes.
- Available-for-sale securities declined to $449.39 million from $480.06 million. Unrealized losses were $22.95 million; the portfolio included $15.59 million of unrealized losses on single-issue trust preferred securities and $7.13 million on non-agency Alt-A mortgage-backed securities. The company recorded $0.21 million of Q3 and $0.74 million of nine-month credit impairment charges on a non-agency MBS.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management described interest-rate sensitivity as within policy limits and relatively neutral; modeled net interest income rose 5.7% under an immediate +300-basis-point shock and fell 1.3% under a -100-basis-point shock.
- The company completed a private placement of 18,921 Series A preferred shares for $18.92 million gross proceeds. The shares carry a 6% noncumulative dividend, are convertible into 69 common shares each, and mandatorily convert after five years; redemption at face value is permitted after the third anniversary.
- Three insurance offices were sold in July and August. The company recorded $0.07 million in net gains and may receive up to an additional $0.65 million in earn-out payments. The offices generated approximately $0.57 million in annualized revenue.
- Risks cited include local and national economic conditions, borrower performance and collateral values, interest-rate and market movements, securities impairment, regulatory changes, and execution of acquisitions. The Dodd-Frank Act’s effects remained subject to rulemaking and were difficult to estimate.
- Bank dividends to the holding company are restricted following prior securities impairments and require regulatory permission. Management said parent-company resources and arrangements were adequate for obligations and projected shareholder dividends over the next 12 months and the projected restriction period.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material risk-factor changes or material internal-control changes were reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether elevated nonaccrual loans, rising OREO, and collateral-dependent commercial exposures lead to further losses or allowance changes.
- The sustainability of net interest income and margin amid low rates, loan contraction, and shifts in deposit mix and funding costs.
- The valuation, credit performance, and potential further impairment of trust preferred and non-agency mortgage-backed securities.
- The effect of preferred dividends and potential conversion on common earnings per share and dilution.
- Whether deposit trends, FHLB availability, regulatory restrictions on Bank dividends, and other liquidity sources remain adequate.
- The realization and timing of the insurance-office earn-out and the continuing impact of agency divestitures on commissions and earnings.